C&S Wholesale Grocers this morning announced that it will spend $1.77 billion to acquire SpartanNash, a deal that, if approved by regulators, would bring together the third and sixth ranked supermarket grocery wholesalers in the country.
The boards of both companies have approved this “definitive merger agreement.” The announcement maintains that the deal “will enable the combined company to more efficiently serve customers and communities across the United States and is expected to make groceries more affordable for millions of Americans.”
It is suggested that the deal could close by the end of this year.
The rationale for the deal is laid out this way in the announcement:
• “Together, the combined company will operate almost 60 complementary distribution centers covering the U.S. and will serve close to 10,000 independent retail locations, with collectively more than 200 corporate-run grocery stores.”
• “Being able to operate at a larger scale, supported by the combined innovative capabilities of the two companies, enables a more efficient supply chain as well as an ability to secure the best possible delivered cost of goods and promotional discounts, which are expected to translate to better pricing for community retailers and at the shelf for consumers.
“Profit margins in the grocery industry are very low — averaging only 1.6% — and customers and consumers deserve the best value for food and household goods. The stability of the combined organization will allow the combined company and its customers to better compete against various extremely large global grocers in the U.S. food-at-home space, a more than $1 trillion annual industry.”
C&S has total annual revenue in the neighborhood of $23 billion, and SpartanNash annual sales are just shy of $10 billion.
The combined company will operate almost 60 complementary distribution centers covering the U.S. and will serve close to 10,000 independent retail locations, according to the companies.
Scott Moses of Solomon Partners (who often has contributed to MNB) is serving as the exclusive financial advisor to C&S.
KC’s View:
If my math is correct, this deal will make the combined C&S and SpartanNash in the running to be the biggest supermarket grocery wholesale company in the country. Leader UNFI has annual sales of about $31 billion, while C&S now is at about $20 billion, and SN is just shy of $10 billion (though not all of that is supply). So let’s be clear – while UNFI may remain number one (by a billion or so dollars) this deal does reshuffle the deck of grocery wholesaling in the US.
But it does so at a time when, for competitive reasons, that deck may indeed need to be reshuffled.
I would guess that this deal will not get the kind of scrutiny and push-back that the proposed Kroger-Albertsons deal did. That largely will be because the wholesale business is a lot less known that the retail business; people had a visceral reaction (right or wrong) to the merger plans of two giant grocers because they feel a connection to their local grocery store, but wholesalers are a far less visible quantity.
It is possible, I suppose, that some politicians or regulators could argue that while such a merger allows the combined company to lower prices, it also creates less competition, which would allow it to raise prices. But the response to that is simple – sure, we could raise prices on our retailers, which would force them to rise consumer prices, but that would be stupid because it would allow Walmart to sweep in with lower prices, putting them out of business.
C&S and SpartanNash also don’t have a lot of obvious overlap – they don’t compete in a lot of geographies, and SpartanNash has a much bigger (though hardly overwhelming) stable of owned-and-operated stores. We know that C&S wants to be in the retail business – hence its desire to buy the stores that would have been divested in the Kroger-Albertsons deal – and this gives it at least a few more of these.
I’ve been doing this a long time, and when I started out there were three major wholesalers – Fleming, Supervalu and Scrivner – that don’t even exist as entities anymore. C&S and SpartanNash will legitimately argue that a heightened competitive environment makes this deal not only smart, but necessary, lest they go the way of their fallen brethren.
That said, even a reshuffled wholesale deck is in a game that in some ways is rigged against independents – behemoths such as Walmart, Costco and Amazon are incredibly powerful players with enormous resources. So the game is hardly over.
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